Ethical practices in accounting are essential for maintaining financial integrity and public trust. The global accounting services market, valued at $587.94 billion in 2021, is projected to reach $1,738.70 billion by 2031. This growth indicates that more companies are recognizing the importance of proper accounting practices.
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Ethical accounting ensures accurate financial reporting, protects stakeholder interests, and supports long-term business sustainability.
But what is ethics in accounting? Let’s understand. We will also explore its basics, ethical principles in accounting, the consequences, and the best practices.
What Is Ethics in Accounting?
Professional ethics in accounting is all about adherence and commitment to the set of guidelines that accounting professionals must follow. Doing so helps build trust, avoid fraudulent practices, and win the public’s confidence.
Each organization is different, and so are their accounting practices. So, accounting professionals must invest their time and energy into understanding the basic ethical accounting standards, rules, and guidelines that govern the organization’s functioning.
What Is the Importance of Ethics in Accounting?
The role of ethics in accounting has become more critical than ever. Awareness of common ethical issues in accounting can help prevent costly mistakes and potential legal complications. Moreover, accounting organizations and governing bodies worldwide have developed ethical accounting standards over time. Here are a few examples of such standards,
- Members of the American Institute of Certified Public Accountants (AICPA) must comply with its Code of Professional Conduct.
- CPAs in Australia and New Zealand must adhere to APESB (Accounting Professional & Ethical Standards Board) standards and practices.
- Financial Accountants in the United Kingdom must comply with the code of ethics in accounting laid down by the Institute of Financial Accountants.
Let’s understand the importance of ethics in accounting in detail.
1. Build Public Trust
While making key investment decisions, the general public and investors depend on the information from accounts. Ensuring the dissemination of authentic information is a must in the accounting profession. Otherwise, the public may lose trust in the profession, which impacts the reputation of the accounting profession and that of the business.
2. Maintain Confidentiality
Accountants deal with huge volumes of sensitive information daily, including business earnings, bank account details, credit card numbers, financial statements, audit reports, social security numbers, payroll data, financial projections, investment strategies, pricing information, etc.
Accountants are responsible for maintaining confidentiality and not sharing them with anybody outside the organization. If you are an accountant, never share sensitive information over email or public Wi-Fi. Even if you must email the data, use private Wi-Fi or a network while transferring information.
3. Mitigate Legal Risks
When accountants adopt ethical behavior and adhere to standards and norms, it helps mitigate the legal risks and uncertainties associated with a business. Even a small unethical behavior of the accountants may lead businesses to fines and penalties, which could impact the business’s reputation in the long run.
4. Mitigate Business Risks
When ethics for accounting professionals becomes their guiding principle, it helps build trust in the minds of the customers, suppliers, investors, and other stakeholders. On the other hand, if they exhibit unethical behaviors, the business can lose customers, investors, clients, supplier networks, etc., eventually impacting their revenue and profitability. The cost of not adhering to ethical commitments and integrity may produce broad-based adversities apart from legal risks and complications.
5. Competitive Advantage
Today’s marketplaces are more crowded, and businesses endure cut-throat competition. Adopting ethical accounting standards helps businesses lure more customers on the one hand and investors on the other, which helps scale the customer base, revenue, and profitability.
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6. Win More Clients
Ethical behavior is the hallmark of integrity in the accounting profession. As much as accounting ethics is important for your client’s business, it plays a crucial role in promoting the success of your profession. No business would want to hire an accountant who lacks basic integrity. Upholding ethics and integrity may help win more clients and scale your profession.
7. Professional Competence
Given the scale and pace of technological advancements, businesses endure continuous disruption. Ethical accounting standards, compliance norms, golden accounting rules, etc., keep changing, and you must update yourself periodically.
In case you don’t have the knowledge and expertise to perform a specific task or the accounting system, you must come forward and disclose it to your client. Or you should consult someone before you do the job. If you are employing junior cadres to do a job, ensure they have the required qualifications and competence.
Basics of Accounting Ethics
Accounting ethics refers to the standards, principles, and frameworks that guide accounting professionals. Because accountants work closely with the financial information of individuals and businesses, ethical conduct is a natural expectation of the profession.
Accountants deal with critical, confidential information that can significantly impact a business’s functioning and financials. For example, disclosing major decisions like mergers or acquisitions may affect stock prices. Such accounting information should never be disclosed without management approval.
Financial statements reveal a business’s health, so accountants must not manipulate data. Reports should present an accurate picture of the business, as this trust is essential for long-term operations.
As the business world evolves, accounting professionals must enhance their skills, including understanding accounting tools and systems to streamline operations. Professional competence allows accountants to focus on crucial tasks requiring human intelligence and skills.
6 Ethical Principles in Accounting
Adhering to ethical accounting standards helps accountants maintain their professional integrity and the trust of their clients and the public. Let’s understand these 6 ethical principles in detail.
1. Work in The Public Interest
Accountants must aim to build trust in the public’s minds and prioritize their interests. They must commit themselves to meeting the expectations and interests of the public, companies, and individuals in society. Doing so enhances their trust in the process and confidence in the financial statements.
For businesses, adherence to accounting ethics and standards helps build credibility in financial statements, eventually leading to a more stable business environment.
2. Act with Integrity
Accountants should adhere to integrity and remain honest in their professional endeavors. They must not endorse or participate in activities that may be suspicious, false, or misrepresenting. Accounting professionals should not engage in activities that may result in a conflict of interest between their business or individual clients.
While working with clients, auditors and accounting professionals must not manipulate their clients’ financial information for personal or professional returns. They should disassociate themselves from participating in illegitimate activities.
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3. Avoid Conflicts of Interest
Accountants must always refrain from participating in activities with conflict of interest. They should commit themselves to maintaining professional conduct of business at all times. Also, they must make informed recommendations to clients and avoid bias and judgments.
For instance, if you are engaging a junior-level staff to work for a client, you should only engage them to perform tasks they are qualified for. You must not offer an advisory unless you have the expertise and educational background in financial products and services.
4. Be Objective
As an accounting professional, you must remain objective and not let subjective factors and biases rule your decisions or behavior. Such influences are detrimental to your profession and ethical commitment. You should commit yourself to being impartial and unbiased in your professional endeavors. Never let personal or professional relationships influence your decisions or behaviors. They should distance themselves from questionable relationships and connections.
5. Respect Client Confidentiality
Commitment to confidentiality is a crucial principle that accounting professionals uphold, no matter what. They should never disclose sensitive financial information of a firm. Doing so can ruin the trust you have built with the clients over the years. Accounting professionals must never disclose any information to people inside and outside the organization without the consensus of the respective business stakeholders.
6. Build Professional Competence
Accounting professionals must stay updated on the latest technologies, legislation changes, and best practices in the industry. Updating themselves to the latest business requirements and developments would help them stay aligned with factors that impact their decisions. Professional competence also means being conscious of the boundaries of your expertise and not moving beyond the fringes of your skillset and knowledge.
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The Consequences of Unethical Accounting Practices
Unethical accounting practices impact the moral conduct of business, damaging the professional and business reputation and leading to losses. Let’s understand this in more detail.
1. Damaged Reputation
Not adhering to the principles that govern ethics in accounting can impact the reputation of a business. It creates a lack of trust in the minds of business partners, customers, and clients. It must be noted that consumers, investors, employees, and other key business stakeholders prefer to participate and engage in a business that adheres to ethical practices.
2. Lost Customers
Customers always choose to buy from and associate themselves with businesses that unwaveringly commit themselves to ethical standards. Today’s consumers are extremely conscious about the buying decisions they make. Given all these, they may choose not to buy from businesses that lack transparency, misrepresent financial information, or breach ethical conduct.
3. Legal Problems
Unethical accounting problems may lead to legal issues and problems at the state or federal level. If a business engages in fraudulent activities or other financial crimes, the business stakeholders and the accountants stand a chance of facing legal complications. In the case of less serious offenses, the accountant may endure fines, loss of license, etc., and the business may experience hefty fines, penalties, tax liability, etc.
4. Lost Employees
Beyond customers and investors, employees prefer to work in a firm that adheres to ethical commitment. Trust is a major factor that affects your employer’s brand. If the employees know that their firm is engaging in unethical accounting practices or ethical issues in accounting, they might not want to work with the firm.
Accounting Ethics Examples
Now that we have discussed the role of ethics in accounting, let’s look at some accounting ethics examples to understand it better.
- A pharmaceutical company, ABC Limited, employs an accountant to manage inventory and pricing for its global drug export business. The accountant discloses confidential information about an impending stock price decrease to personal contacts, who subsequently purchase additional shares.
Upon investigation, this breach of confidentiality is identified as unethical conduct, resulting in disciplinary action against the accountant. This case illustrates the critical importance of maintaining confidentiality and avoiding the misuse of privileged information in accounting practices.
- XYZ is a financial service consultant, and he is known for offering financial advice to many customers. Some financial product vendors offer incentives and rewards to the consultant for promoting and suggesting their products to their customers. In return, he endorses the products of that vendor. This is an example of unethical accounting practice and misuse of customer trust.
- In PKG Limited, an accountant handles all reimbursements. Ideally, the accountant is expected to clear the reimbursements on a first-come, first-serve basis. However, he displayed favoritism and bias and paid his favorite employees first. This is another example of accounting misconduct. Accountants should never display subjectivity and favoritism in their commitment. They should always be objective and unbiased.
How To Improve Ethics In Accounting?
Enhancing ethics in accounting is crucial for maintaining financial integrity and stakeholder trust. Organizations can take several concrete steps to foster a culture of ethics within their accounting departments.
- Implement a code of ethics: Develop and enforce a comprehensive code that outlines ethical standards and expectations for all accounting personnel.
- Provide regular ethics training: Offer ongoing education to keep staff informed about ethical practices, regulatory changes, and potential dilemmas.
- Establish clear reporting procedures: Create accessible channels for reporting ethical concerns or violations without fear of retaliation.
- Encourage transparency in financial reporting: Promote open communication and full disclosure in all financial documents and processes.
- Enforce accountability for ethical violations: Implement consistent consequences for breaches of ethical standards to reinforce their importance.
- Promote a culture of integrity: Foster an environment where ethical behavior is valued, recognized, and rewarded at all levels of the organization.
- Implement strong internal controls: Establish robust systems and procedures to prevent and detect unethical practices or errors in financial reporting.
- Provide regular ethics training: Offer ongoing education to keep staff informed about ethical accounting standards, regulatory changes, and potential ethical issues in accounting.
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Conclusion
Upholding ethics in accounting is crucial for business integrity and success. By prioritizing and addressing ethical issues in accounting, organizations not only mitigate risks but also create a culture of transparency and accountability. Adhering to the code of ethics in accounting requires ongoing commitment, regular training, and robust internal controls. As the accounting profession evolves, these ethical practices help navigate complex financial landscapes and ensure compliance with regulations.
Some of the main ethical issues in accounting faced by professionals include:
- Tax evasion,
- Breach of trust,
- Loss of confidential information,
- Bribery and incentives,
- Lack of transparency,
- Conflict of interest,
- Favoritism and bias.
Accounting professionals must make objective decisions and avoid subjectivity, bias, personal judgments, favoritism, etc. They must be able to make independent decisions without these influences. To do this, accounting professionals must
- Abide by the guidelines set by the professional associations of the country of their operation,
- Not engage in receiving incentives, rewards, or compensation and endorse the financial products or services of a company,
- Not display favoritism towards any stakeholder in the business,
- Not disclose confidential information, both within and outside the organization.
Unethical behavior in accounting may lead to
- Reputational damage,
- Loss of customer base,
- Loss of investor trust,
- Legal complications,
- Loss of employee trust.
Pratiiek Mavani is a seasoned professional in accountancy, taxation, audit, and finance, boasting over 16 years of industry expertise. He specializes in conducting audits for diverse entities including banks, optimizing their core processes through cost management and budgeting. With a focus on income tax and GST, he has represented various clients in cases and appeals concerning direct and indirect taxes across different levels.
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